#1
Which capital budgeting technique considers the time value of money?
Net Present Value (NPV)
ExplanationNPV accounts for the present value of future cash flows, considering the time value of money.
#2
Which of the following is a disadvantage of using the Internal Rate of Return (IRR) as a capital budgeting technique?
Subject to reinvestment rate assumptions
ExplanationIRR's accuracy relies on assumptions about reinvestment rates.
#3
In capital budgeting, what does the Modified Internal Rate of Return (MIRR) address that the Internal Rate of Return (IRR) does not?
Ignores reinvestment rate assumptions
ExplanationMIRR avoids reliance on assumptions about reinvestment rates, unlike IRR.
#4
What is the primary advantage of the Profitability Index (PI) as a capital budgeting metric?
Incorporates the time value of money
ExplanationPI considers the time value of money, enhancing the accuracy of investment evaluations.
#5
What does the term 'Crossover Rate' represent in the context of capital budgeting?
The discount rate at which two projects have equal NPV
ExplanationCrossover Rate indicates the discount rate where two projects have the same NPV, making them equally desirable.
#6
What does the Payback Period measure in capital budgeting?
Time required to recover the initial investment
ExplanationPayback Period measures how long it takes to recoup the initial investment.
#7
Which capital budgeting technique uses the accounting net income to calculate the rate of return?
Internal Rate of Return (IRR)
ExplanationIRR utilizes accounting net income to compute the rate of return.
#8
What does the term 'Mutually Exclusive Projects' mean in the context of capital budgeting?
Projects that cannot be implemented simultaneously
ExplanationMutually Exclusive Projects are alternatives that cannot be pursued simultaneously.
#9
Which capital budgeting technique is most suitable for evaluating projects of different sizes?
Profitability Index (PI)
ExplanationPI accommodates projects of various sizes for comparison.
#10
What is the primary drawback of using the Accounting Rate of Return (ARR) as a capital budgeting technique?
Does not consider the time value of money
ExplanationARR overlooks the time value of money, potentially leading to inaccurate assessments.
#11
What is the main drawback of the Payback Period as a capital budgeting technique?
Ignores the time value of money
ExplanationPayback Period disregards the time value of money, affecting accuracy.
#12
In capital budgeting, what does the Profitability Index (PI) measure?
Return on investment relative to the initial cost
ExplanationPI evaluates ROI concerning the initial investment amount.
#13
What is the primary focus of the Net Present Value (NPV) calculation in capital budgeting?
Discounted cash flows
ExplanationNPV primarily focuses on present values of cash flows, adjusting for time value.
#14
How does the Profitability Index (PI) differ from the Payback Period as a capital budgeting metric?
Considers the time value of money
ExplanationPI accounts for the time value of money, unlike the Payback Period.
#15
What is the formula for calculating the Net Present Value (NPV) of a project?
NPV = Present Value of Cash Inflows - Initial Investment
ExplanationNPV is computed by subtracting the initial investment from the present value of cash inflows.